Why should they trust me?

Trust me.  I am an appraiser.  I am trained.  I have experience. I have high ethical standards – and a government-issued license which says so!  What more could you ask?

What more could you ask?  To answer this question, let’s look at what the client needs and what is the real “public good”.  This may be a simple exercise.  They ask for what they buy.  So – what are they buying?  And who are “they”?  Is it simple?  Or is it a messed-up system?

These are broad questions, but we start at the beginning.

Many believe in the benefits of free enterprise and open market participation.  So, the market for valuations should naturally allow the best and most useful service/product to emerge.  It should.  To check this idea, we need to look at two things:  1) What do the users of appraisals need; and, 2) What may get in the way of the ‘best’ product arriving on the desk of the decision maker.

The clients.  Lenders are the biggest users of appraisals in the US.  So, we look here first: what is their motive and what do they want?  Again, it depends on which “they” we’re talking about.  We can break this down into five types of “they” within the mortgage industry.  These are mostly large organizations, with varying dynamics and different motives, depending on the function and level within the hierarchy.

• Loan production. Generally, they are paid with some type of reward, whether salary or commission on the amount of loan volume.  →  Cheap.  Fast.  Hit the needed number.
• Appraisal management. These people too are judged on volume.  This includes AMCs (Appraisal Management Companies).  The pressure is the same:  fast, cheap, hit the number, and add — get some ‘departmental’ profit.  (The appraisal department or AMC cannot take a loss!)  But we add one more requirement – the appraisal must look good.  Good enough to pass a checklist.
• Portfolio management. Now the motive changes a bit.  There may even be some attention to longer run consequences.  Unfortunately, with appraisal commoditization and resale to the Government Sponsored Enterprises (GSEs), the motive is to meet minimum constraints of Fannie Mae, Freddie Mac and such.  Again – good enough to pass on.
• Top management. Here there may be attention to somewhat longer-run results.  Perhaps even a few years.  At least long enough to earn bonuses and stock options and such before the next decennial mortgage-driven economic crisis.  Some attention to actual risk of increasing losses and catastrophic crisis is necessary.  At least lip service.  The risk of personal civil or criminal is not great.  Personal responsibility for future corporate loss and public disaster is denied.  Personal psychological denial is abetted by universal groupthink.
• Board of Directors. Here the motive should be the highest stock share value.  This would ordinarily be based on future profit/dividend/potential.  There may be a great deal of variation in personal motives.  Some truly wish to maximize value, with long-term perspective, and perhaps even some social conscience.

In future blogs, we will first consider what might be the ideal valuation product, and appraiser service of the future.  To do this, we will look at what’s in the way of the ‘best’ product arriving on the desk of the decision maker at each of the above levels.  These may include appraisal education, standards, regulation, resistance to change, and even the psychology of human behavior.  Basically, “How did we get into this rabbit hole?”

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